SEC: ‘Fantasyland of fraud’ at Home Solutions of America
Monday, November 30, 2009, 1:39pm EST | Modified: Monday, November 30, 2009, 3:21pm
Tampa Bay Business Journal - by Janet Leiser Staff writer http://tampabay.bizjournals.com/tampabay/stories/2009/11/30/daily6.html
The Securities and Exchange Commission charged Home Solutions of America Inc.’s former executives Frank Fradella, Jeff Mattich and Tampa businessman Brian M. Marshall with fraudulently inflating the stock price to reap financial rewards.
“The company’s financial results were largely fabricated and its public statements were intended to deceive,” Rose Romero, director of the SEC’s Fort Worth, Texas regional office said in a Nov. 30 statement.
“Simply put, instead of rebuilding New Orleans and other hurricane-stricken areas, they constructed a fantasyland of fraud,” Romero said.
In 2006, Home Solutions, then based in Dallas-Fort Worth and listed on the Nasdaq, reportedly paid up to $50 million for Tampa’s Fireline Restoration Inc., a Florida general contractor that specialized in disaster restoration services. Marshall, founder of Fireline, became a director and president of Home Solutions, which has been based in New Orleans since July 2008.
SEC investigators allege that executives at Home Solutions, now listed as HSOA on the pink sheets, lied about business deals in the wake of Hurricane Katrina to pump up the stock price and then sold millions of dollars in shares.
The company recorded millions of dollars in bogus revenue and issues a series of materially false press releases boasting robust finances for the company following weather-related disasters, states the SEC.
The stock price hit a high of $13 before it plummeted following large insider stock sales, class-action shareholder lawsuits and the company’s public acknowledgement it would restate previous incorrect financial statements.
Fradella, HSOA’s chief executive officer from 2001 through 2008, dumped $6.8 million in stock between May 24-26, 2006, the SEC alleges.
Fradella, Mattich, who was chief financial officer, and Marshall “engaged in a series of revenue-inflation schemes, booking millions of dollars of bogus revenue by invoicing and recording receivables on work that never occurred,” states the SEC.
Marshall is accused of engaging in a separate revenue-inflation scheme at Fireline by booking more than $9 million of fake construction revenue from undisclosed, related-party contracts with entities he controlled, said the SEC.
Marshall’s business partner, Jeffrey T. Craft of Craftmar Construction Inc., has consented to a permanent injunction for his involvement with Fireline, the SEC said.
Even before Home Solutions acquired Fireline in July 2006, Marshall allegedly assisted Home Solutions in generating bogus revenues by awarding a contract to HSOA to perform work on Vista Royale, a Vero Beach condominium project on Florida’s east coast damaged by a hurricane, the SEC said.
Home Solutions never performed work on Vista Royale, yet it sent $8.4 million in invoices to Marshall, according to the SEC complaint. Based on those invoices, HSOA recorded $8.4 million in bogus revenue for the second quarter of 2006.
In turn, Home Solutions sent checks for about $2.7 million to Marshall for subcontractors that reportedly worked on Vista Royale, states the complaint. About $1.3 million was paid to entities controlled or managed by Marshall.
Beginning in December 2006, Marshall began a scheme to inflate Fireline’s revenue by causing private companies he controlled to enter into contracts for construction work. He then directed Fireline Vice President Thomas Davis and other employees to create documents and make accounting entries to make it appear Fireline was performing the work, states the complaint.
During 2006 and 2007, Marshall caused Fireline to enter into at least 10 related-party contracts, including a $4 million contract for the construction of Marshall’s home.
“When counsel to HSOA’s audit committee visited the Tampa construction sites in October 2007, most were bare lots or just in the initial stages of construction,” states the complaint.
For the year ended Dec. 31, 2006, Home Solutions’ revenue was overstated by $3.2 million while operating income was overstated by about $1 million.
For the six months ended June 30, 2007, Home Solutions’ revenue was overstated on these projects by $6.9 million, states the complaint.
To perpetuate the scheme, Marshall had Craft, his partner at Craftmar Construction, provide a false confirmation letter of the work to KMJ Corbin & Co., HSOA’s accounting firm, the complaint states.
Marshall, Fradella and Mattich are charged with violations of the antifraud, reporting, books and records and internal control provisions of the federal securities laws. The SEC is seeking permanent injunctive relief and financial penalties.
In addition to Craft, three others, including Davis, agreed to a settlement with the SEC without admitting or denying allegations in the complaint filed Monday in U.S. District Court, Northern District of Texas.
Former Chief Financial Officer and Chief Operations Officer Rick O’Brien consented to a permanent injunction and $130,000 penalty. And former controller Stephen Gingrich consented to a permanent injunction, a $25,000 penalty and an order barring him from practicing before the SEC as an accountant for at least three years. http://tampabay.bizjournals.com/tampabay/stories/2009/11/30/daily6.html